Foreign investors in Myanmar 'must consider financial protection'

Myanmar’s military summarily detained and placed into confinement up to 45 people on Monday, including state counselor Aung San Suu Kyi, president Win Myint and elected parliamentarians. It erected checkpoints around the capital Naypyitaw and announced a one-year state of emergency and the appointment of the former vice president, Myint Swe, as president of Myanmar pending new elections. The National Defense and Security Council has asserted, without substantiation, that last year's election of a government led by Aung San Suu Kyi was marred by fraud and threatened Myanmar’s sovereignty, thereby justifying the seizure of power.

Borders with Thailand are sealed and the status of the usually porous borders with China, India, Bangladesh and Lao are unknown, while internet based communications are poor.

The junta is likely to restrict the movement of people and possibly capital. This might in turn lead to restrictions on the movement of goods, materials, equipment and money. Any of these restrictions could delay transactions, industrial operations, infrastructure works and supplies. Widespread strikes and military take-overs of utilities are by no means unforeseeable.

At both the national and provincial levels, the relative self-assuredness and work of the bureaucracy is likely to be severely disrupted, leading to delays in forward-budgeting, negotiations, approvals, formalisations and pre-committed payments.

Foreign lenders, insurers, developers, contactors and trade partners ought to take stock of any applicable contractual and investment-treaty protections to understand their options. Prompt action now is essential to preserve rights enshrined in contracts.

Foreign lenders are unlikely to find force majeure protection because loan agreements do not contain force majeure type clauses so any claims of either side would have to be founded on specific provisions in the agreements.

These loan agreements also do not generally include an extraordinary change in government or coup d’état as a specific event of default. More commonly they include 'material adverse change' as events of default, and the wording of these tends to vary from deal to deal and must be considered on a case by case basis. However these are generally restricted to events affecting the ability of the borrower to perform its obligations or the “interests of the lender”, which is usually interpreted as being a threat to any security that the lender may have.

Where borrowers in Myanmar may have difficulties is if the country becomes subject to sanctions. Most international loan agreements have detailed sanctions provisions generally entitling lenders to call a default if the host country becomes sanctioned by a relevant sanctions authority, and the US is always included as such an authority.

Investors, including lenders, insurers, developers and contractors, might have access to relief and if necessary remedial options under Myanmar’s numerous bilateral and multilateral investment treaties, such as the ASEAN Comprehensive Investment Agreement, whose Article 12 accords investors non-discriminatory treatment in the event of armed conflict or civil strife or state of emergency.

Insurers will be particularly alert to the possibility of having to respond to claims brought by lenders, private equity investors, concessionaires and contractors under political risk and sovereign credit insurance policies.

Investors who are in direct contractual relations with government organs and government related entities might have sources of protection in their contracts too. For instance, public utility concessionaires will often find protection in the force majeure provisions of the project agreement.

Contractors whose construction contracts or consultancy agreements are modelled on the FIDIC model forms commonly used in Myanmar might look for protection as to both time and money under the force majeure and 'employer’s risks' provisions. These provide grounds for the contractor or consultant to seek relief from performance, an extension of time and possibly additional payment, especially if there is a loss of or damage to goods, materials or equipment. Invariably, these sources of contractual protection are after-the-event mechanisms which are triggered by prompt and detailed notification. The active responsiveness to the event is utterly critical to avoiding a loss or exposure to liability.

As with the Covid-19 pandemic, this is a nation-wide situation and consequently protection must be sought both ‘upstream’ with the host government, and ‘down-stream’ with subcontractors and suppliers. At the same time, contractors at the main and higher tiers of a supply chain should examine their own supply chain for exposure to sub-contractors seeking similar relief from them and ensure they are aware of the scale of their potential exposure.

The implications of military seizure of power might also affect responsibilities under joint venture agreements and other commercial associations.

In the longer term, projects are likely to be affected by sanctions, which are a likely international response to the seizure of power. These can apply retroactively, as some have called for in Myanmar, before yesterday’s events. Though that is unlikely here in the case of the UN. But if they are severe then it could make completing contracts difficult, and is likely to slow any future development. Sanctions will also affect banks, especially those that have previously been hit with penalties. Banks will also be affected if the asset or project is expropriated by the state.

Funding for projects in Myanmar is likely to be harder to come by in light of the military action, meaning that fewer projects will be pursued.